Good day everyone, and welcome to the Sinclair First Quarter 2023 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Lucy Rutishauser, Executive Vice President and Chief Financial Officer of Sinclair. Ma'am, the floor is yours.

Thank you, operator. Participating on the call with me today are Chris Ripley, President and CEO; and Rob Weisbord, President of Broadcast and Chief Operating Officer. I would like to also introduce our new Vice President of Investor Relations, Chris King, who we’re excited is joining us. Chris comes to us from Windstream Communications, where he was Vice President of Investor Relations. And before that, Curo Health Services, where he served as Vice President of Investor Relations and Financial Planning and Analysis. Before transitioning to the corporate side, Chris was a senior equity research analyst at Stifel Nicolaus, where he won numerous awards for his stock picking and earnings analysis in the TMT space. Welcome, Chris. Before we begin, I want to remind everyone that slides and supplemental information for today's earnings call are available on our website, sbgi.net, on the Investor Information page, and on the Earnings Webcast page. I also want to remind you that today's call is a Sinclair earning call. Because we are currently soliciting proxies from our stockholders in connection with the previously announced holding company reorganization, our statements regarding the reorganization will be limited to statements contained in Sinclair Inc's prospectus and Sinclair Broadcast Group's definitive proxy statement, each filed with the SEC on April 26, 2023, as well as the Reorganization Q&A followed by Sinclair Broadcast Group with the SEC on April 2. Our stockholders are urged to read these documents because they contain important information regarding the Reorganization. Now Billie-Jo McIntire will make our forward-looking statement disclaimer.

Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those described in the forward-looking statements as a result of various important factors. Such factors have been set forth in the company's most recent reports as filed with the SEC, and included in our first quarter earnings release. The company undertakes no obligation to update these forward-looking statements. The company uses its website as a key source of company information, which can be accessed at www.sbgi.net. In accordance with Regulation FD, this call is being made available to the public. A webcast replay will be available on our website and will remain available until our next quarterly earnings release. Included on the call will be a discussion of non-GAAP financial measures, specifically adjusted EBITDA, adjusted free cash flow and leverage. The company considers adjusted EBITDA to be an indicator of the operating performance of its assets. The company also believes that adjusted EBITDA is frequently used by industry analysts, investors and lenders as a measure of valuation. These measures are not formulated in accordance with GAAP and are not meant to replace GAAP measurements and may differ from other companies' uses or formulations. The company does not provide reconciliations on a forward-looking basis. Further discussions and reconciliations of the company's non-GAAP financial measures to comparable GAAP financial measures can be found on its website, www.sbgi.net. In addition, given the deconsolidation of Diamond on March 1 of 2022, and in order to have a meaningful discussion around comparative results and trends, all discussions of prior financial reporting periods during this call reflect Sinclair only pro forma numbers, and thus, exclude Diamond and any intercompany transactions with them and exclude businesses sold in the prior 12 months. For actual results, including the period that Diamond was consolidated, please refer to this morning's earnings release. Chris Ripley will now give an update on the strategic direction of the company.

Thank you, Billie-Jo. I want to begin our announcement to reorganize, or I want to begin with our announcement to reorganize under a holding company. Under the new structure, which we expect to close in June, Sinclair Inc. will become the publicly traded parent of Sinclair Broadcast and its subsidiaries, which will hold the pure-play broadcasting assets and a new subsidiary, Sinclair Ventures that will hold the company's non-broadcasting assets. We believe this will provide greater flexibility for creating value within the company. This simplifies the corporate structure and improves the transparency of financial results and disclosures on the value drivers of the business. Another way to think about the new structure is that our broadcast assets will remain in Sinclair Broadcast Group, while our non-broadcasting assets, including Tennis Channel, Compulse and our non-media assets like real estate, venture capital, private equity and direct investments will be in ventures. While we're optimistic about the future prospects of our core broadcasting business and its continued transformation through investments in news programming, cloud and NextGen Broadcast, continued regulatory uncertainty is causing us to think differently about the allocation of capital. With continued governmental restrictions on broadcasters' ability to transact, transform and negotiate, we intend to allocate more capital to growing non-broadcast holdings such as future opportunities in India where NextGen technologies are swiftly advancing. This reorganization will allow more flexibility for transactions, transparency around the sum of the parts, ultimately creating a non-broadcast division free to raise debt or equity financing to grow its assets, and a broadcast division that is pure play and focused, unlocking overall value for our organization. Speaking of value creation, in recent weeks and advance of NAB, we made several exciting announcements around the advancement of NextGen Broadcast technology. In particular, we announced that Sinclair, along with…

Thanks, Chris. Coming off a record midterm election year in 2022, political spending has started off strong with over $3 million booked in Q1, which is double the spending of Q1 2019. We were excited to see the strength in political candidates and issue spending this early in the year. We are projecting political spend to continue and set us up nicely for our highly contested presidential race in 2024, which we expect to be record-breaking once again. Our success in selling high-profile time periods, such as Super Bowl and March Madness, resulted in advertising in the first quarter, achieving the high end of our guidance. Core advertising decreased slightly in the first quarter compared to the same period a year ago. The automotive category has been steadily rebounding since the beginning of the year, and we are seeing low single-digit percent increases in Q2 phase, along with the strength in legal and retail categories. These positives are offset by softness in the insurance category. Second quarter is expected to decline low single digits, but in line with Q1 core, when you exclude the Super Bowl and March Madness. This quarter, we began rolling out the first phase of our Unified Ad platform, which combines all of Sinclair's advertising, linear and digital assets, and allows our sellers to increase velocity of cross-platform ad campaigns by highlighting the combined reach and frequency. The technology makes us the first local broadcast to consolidate all sellable inventory into a single system. Our goal is to make sure all our inventories are easy to package, price and maximize revenue, while meeting the goals of our clients. We've also completed the national rollout of our yield management platform with dynamic pricing. The platform uses artificial intelligence and machine learning, so the algorithms get smarter at…

Thank you, Rob. As a reminder, our slide deck and our financial supplements are on our website, and we'll help you follow along. The $766 million of media revenues came in at the high end of our guidance range, with core advertising achieving expectation and political and distribution revenues surpassing the high end of guidance. The beat on distribution revenue was on slightly better subscriber churn than expected. As compared to the first quarter of 2022, media revenues were down 6%, driven by the absence of political ad revenues, subscriber churn, the Diamond management fee deferrals and core advertising. Adjusted EBITDA of $120 million for the quarter, exceeded expectations due to media revenues coming in at the higher end of guidance and media expenses being better than expectation, primarily on timing and to a lesser extent, cost controls. For the quarter, adjusted EBITDA decreased 40% compared to the first quarter of last year. This was the result of the lower media revenues as discussed and higher corporate and media expenses. The driver of corporate overhead include Group and general insurance cost, annual compensation increased and onetime expenses for professional fees. The media expense lift compared to last year was also due to annual compensation step-ups as well as timing of tennis tournaments and investments in technology. This was partially offset by a reduction in sales expenses. Media expenses were also impacted by higher programming fees to the networks. Speaking of which, and as a reminder on net retrans, we previously reported that since we don't have material distributor contracts renewing until the latter part of this year, and with continued subscriber churn of mid-single digits expected, our expectation is for net retrans in 2023 to be lower than 2022, but then grow in 2024 and 2025 as distributor contracts renew…

[Operator Instructions] Your first question is coming from Steven Cahall from Wells Fargo.

There we go. So I've got a few. Maybe just to start off on the leverage going to the mid-5s. You bought back a lot of stock in the quarter. So as we just think about the moving parts to leverage, is a lot of that cash coming off the balance sheet for investments and stock repurchases, combined with some of the investments dragging EBITDA, but would just love to get the components of the change to leverage from the 4.4 this quarter to the mid-5s?

Yes. So what's in there, Steven, is the second quarter stock repurchases is a piece of that. And then as I talked about, just the direction of adjusted EBITDA this year, which again is a nonpolitical year, net retrans being down, and then the absence political so -- and the investments in the infrastructure. So those are the things that are sort of driving the EBITDA, and then you do have the second quarter repurchase in there. And then that 5.5 also assumes a successful closing for Holocau and Tennis shifting out of the STG attributable EBITDA for leverage. And as we said in our Q&A around Holocau, that was worth 0.3 churns of leverage.

Got it. That's very helpful. And then, Chris, you've talked a lot about the value of the investments in ventures and that marketing that you've got at $1.3 billion. Could we expect any incremental financial disclosure to understand the components of that? I'm thinking specifically about real estate and PE and the venture capital investments, and just how we might think about those? And relatedly, how do we think about the accounts receivable facility given Diamond's current financial condition?

Sure. So we have to be careful about additional information around holding company because we do have an outstanding share exchange offering. So we really can't say anything more than what is in that document without triggering an amendment requirement. So I would point you to that document for your questions there. We do -- we will -- once that closes, which is expected to be voted on May 24, and then closing in June 1, we will come out with a more detailed vision around ventures and enhanced disclosure is definitely part of the plan. So we -- it's -- what's driving this move as I mentioned in my comments, is this big dislocation between our some of the parts and what's in the public marketplace. And you can see we put our money where [indiscernible] Plus repurchasing the stock recently because of that. And so we're very focused on how do we get the right assets and the right information in your hands so that we can get properly valued. And so we're looking at all options in that regard. And then in terms of your question around the AR facility, I would expect that AR facility to get refinanced at some point in the future. And it is a -- it's a -- we're happy to continue to hold it. It provides a reasonably good return, and it has high-quality security in the form of AR. So -- but our expectation is at some point that would be refinanced.

And then just the last one for me. I think the recent reorganization filing did have a new risk factor that wasn't in the 10-K, suggesting that the Diamond bankruptcy could mean either legal action or adverse tax consequences. Can you just help us frame any material risk that you see at this point or financial liability related to the Diamond bankruptcy?

We really can’t speculate at this point as it relates to Diamond. It would be just pure speculation. And we’ll be back when we know more in terms of Diamond’s future and emergence.

Your next question is coming from Ben Soff from Deutsche Bank.

Just a couple of quick ones. So first, I was wondering, if you could help us quantify the impact of the expenses shifting from 1Q into 2Q? And I also noticed that the value of the investment portfolio went up. So I was just kind of curious, which assets saw their value increase? And maybe if you could talk a little bit more about that dynamic?

Sure. So Ben, I'll take the first one. So the -- sequentially on the expenses increasing from -- media expenses increasing from Q1 to Q2. So there is some timing from Q1, probably about $10 million of timing from Q1 favorable variance that goes into Q2. And then also, you need to recognize that Tennis Channel has a different seasonality profile than the broadcast assets. So whereas for broadcast, our biggest quarter is typically in the fourth quarter, both revenue and expense wise. For Tennis, their biggest expense quarter is the second quarter because that's when Roland Garros happens, that's their big tournament, a lot of production cost around that. And so just so that -- because we haven't talked Tennis in a few years, but just to kind of put their seasonality back in front of everybody from an EBITDA standpoint, historically, Q1 would be their best quarter, followed by Q4 then Q3, those are kind of typically close to each other, though. And then Q2 is their lowest EBITDA quarter, and that's because their expenses are highest around some of the slams and tournaments of production costs. So that's going to be a big driver of that sequential Q1 to Q2 move.

And in terms of the investment portfolio, there was -- it's hard for me to point to any one asset. There were several assets that went up in value in Q1 due to just improved performance on the underlying fundamentals. And then we also had realizations in the quarter of $36 million and those were really high returns, Great Moines apartment buildings that were sold in Q1. And so they were more conservatively marked before exited at higher values and are now sitting in cash. So the combination of those realizations with several assets continuing to perform, increase the value.

Got you. And would you guys be willing to share a little bit more color about the EBITDA that Tennis Channel is generating just roughly?

That will come out in our quarters to come here after we finish the holding company reorg.

Your next question is coming from Dan Kurnos from The Benchmark Company.

Chris, since your gracious enough to give us just a little more color around sort of the vision going forward, maybe I'll ask it that way and try to keep it high level. And just note that your peer group has, obviously, invested in things that are tangential typically to broadcast or have synergistic properties with it. You clearly have a more diversified portfolio and what will eventually be ventures. And I'm just wondering, if you think about sort of future capital allocation, how important it is to you that things be in or around sort of core competencies or historical legacy buckets versus new opportunities?

Yes. I mean it's a great question. When we take a look at the performance of our investment portfolio, which is currently sitting at an IRR of about 19% since 2013. That -- without -- is kind of an obvious statement to say that that's outperformed our equity value over that same period. And so that -- and that really is a quite diversified set of assets, private equity, real estate. There are some assets in there that are complementary to our core business, like Playfly, for instance, which is focused on college MMR. And Saankhya Labs, which is focused on NextGen Broadcast technologies. That -- so -- but when we take a look at what we've been able to do there, it's obvious to us and especially given the regulatory backdrop that I mentioned in my comments that there are better returns for our capital in other areas. And so we're not limiting ourselves just to adjacencies within our core business. So if we do find good investment opportunities there, we'll be -- that kind of view that as a cherry on top, if you will. So it is a more diversified outlook. And I think it's instructed by our history and success in those areas. But there if we can find adjacencies or synergies with our core business, then we'll be all over that.

Got it. That's super helpful. And then just on distribution, particularly around Tennis. You announced two deals, I thought I heard you say that the Hulu station issue, you had an agreement in principle, but I don't know if they took Tennis -- how do we just think about kind of the opportunity for incremental Tennis carriage from here?

Well, look, I think it's a very significant win for the company that YouTube TV is going to be carrying Tennis Channel and all our multi-cast and T2. We will update you on the agreement in principle with Hulu once it's inked, but I can't really get into more details there, but I think there are incremental opportunities for Tennis. It had not been on the virtual's for a few years. And fubo is really sort of the only one it had. Now it's adding YouTube TV. So I'm optimistic about ensuring that Tennis Channel is fully distributed on all platforms.

Got it. And then maybe just a last kind of odd one for you or Rob, just on the rider strike, if there's any kind of like flow through or anything just be curious your opinion there, if there's any impact?

Yes. We’re not really concerned about the rider strike. If it happens, the networks a lot of library ready to go as well as they can spin up reality shows fairly quickly. And the reality shows are right now are trending with higher ratings. So we don’t see that impacting us at all.

Your next question is coming from [indiscernible] from Barclays.

Congrats on the results. I have a little bit more of a general question. How do we think about kind of the upcoming negotiations you guys have scheduled for the second half of '23 in the context of what you already might have negotiated earlier this year? Are the contract -- and I know you guys are probably limited in what you can disclose, but are the contracts both kind of a function of subscriber metrics? Or are part of them fixed? How are those structured?

I assume you're referring to our MVPD contracts which...

Right. Yes.

Yes. In the latter half of -- the back half of this year, we have about 50% of our big 4 subs coming up with the MVPDs, and then another 40% actually front-end loaded to the beginning of 2024. So it's a big period of time there back half of '23, beginning '24, where a lot of our big 4 subscribers get repriced and those are done on a per subscriber basis with the MVPDs.

Okay. And on the national side, are the majority of the contracts fixed are also on a per subscriber basis. So they're kind of moving with any subscriber attrition that you're seeing on the MVPD side?

Yes. So on the network side, and we’ve got a couple of – 2 big negotiations coming up at the end of this year. Those – it’s not universal, but they are more fixed than variable. And we do those every 2 to 3 years and adjust as subscriber trends change.

Your next question is coming from Edward Reily from EF Hutton.

Just some housekeeping. On the $75 million in tech infrastructure spending on this year, how much has been outlaid in the first quarter? And is this bucketed in the corporate G&A line within the other and corporate segment?

So we've spent about $10 million of it in the first quarter, and then you're going to see that in media expenses. What's driving the corporate down versus guidance was really around group and general insurance in the quarter.

Your next question is coming from Avi Steiner from JPMorgan.

Two here. Just on the ad environment, and I apologize if I missed this in the opening remarks, but can you just talk about how it's trending Q2, better or worse, maybe parse it out local, national, and then talk about some categories? And then I've got one more follow-up.

Yes. We're watching the headwinds. But right now, like we gave the guidance low single digits. Local is outperforming national, which tends to be that way when the macroeconomics have some headwinds, but we have a strength on our local side by creating specialty units in auto, legal, where we're seeing positive results from those categories. So again, we'll keep our eye on it, but we're not seeing much differentiation from first quarter, and we aren't taking any major cancellations.

Appreciate that color. And then one last one for me. Chris, you noted the regulatory backdrop and kind of reallocation -- I'm trying to paraphrase you as best I can, reallocation of investment capital to nonbroadcast holdings. Is M&A in that silo going to be funded by the TV silo? Or do you envision raising debt potentially at Sinclair Ventures? And I ask this, obviously, in the context of leverage and everything else.

Sure. So there are significant resources on both sides of the house, if you will. And there is no need for either side to be supporting the other. And so we’ll have to just take it as it comes in terms of what opportunities there are and where each division is in terms of its goals around leverage, et cetera.

Your next question is coming from Barton Crockett from Rosenblatt.

Okay. Great. So one of the things I was curious about was last quarter, there was the discussion about fubo and the desire of the affiliate groups to negotiate directly with the virtual MVPDs versus being represented by the broadcast networks. Now you're starting deals with the vMVPDs, are you able to negotiate directly? Or is that still not something you're able to do? And any prospect for that to change at some point?

No. We are not able to negotiate directly as of now. And we -- as I stated in the last quarter, and you probably heard from many in the industry believe that is a wrong that needs to be righted and feel that there is change foot when it comes to looking at the sector, which was sort of -- at least in the beginning, viewed as an upstart small area that has now grown into a pretty significant part of the ecosystem. And the rules of the road need to be conformed to the change in maturity and size and scope of what the virtuals are. So we're very much focused on that, that from both a regulatory perspective and also just how our relationships work with the networks. They're sort of the two ends of the coin that we're focused on getting that rightsized.

Okay. All right. And then one of the other things that came out last quarter though I was curious for an update, if there's any, was the need -- the desire to have the FCC drop this requirement to broadcast the current kind of ATSC versus the NextGen, so you have -- you're able to kind of more fully tap that capacity. Is there any progress there? Anything to say, how long do you think it might take for there to be some action on that front?

There actually has been quite a significant event as it relates to that question. While we were at NAB, Chairman -- Chairwoman, Jessica Rosenworcel announced that the FCC at the request of the industry, specifically NAB, our industry association is forming a task force to accelerate the -- and complete the deployment of 3.0 in the marketplace. And that's something that we were very focused on getting as an industry. And the details of that task force are being worked on now. But certainly, sunsetting, the 1.0 signals is -- will be a key area of engagement on that task force. And there's really two important things from our perspective and really the industry's perspective on the task force. One is that it shows that the FCC who is largely taking up time, regulating much larger industries than ours is on the same page as the industry in terms of advancing the 3.0 standard, which is very positive from a consumer perspective, from a competitive -- competition perspective. So there is alignment there between us and the regulators, where there might not be alignment on other issues like ownership for instance. And -- but that is an important, I think, statement. And then the second part is having a task force of both industry participants and regulators that are focused with the goal of accelerating 3.0, we believe will accomplish that goal of accelerating 3.0, getting it over the hump, getting it through to the rest of the country, figuring out when we can sunset 1.0. And when you can sunset 1.0 is when you're going to open up a significant amount of spectrum capacity that will really unlock the revenue and value opportunities that we've been talking about on 3.0, as it relates not only to better higher quality and interactive programming for our communities, but also to data casting opportunities around things like enhanced GPS, IoT devices, low-latency sports, mobile video. These are all, we think, excellent use cases that will amount to significant economic opportunities for the industry. And it's a big reason why we announced that we're building the core network to be able to facilitate those use cases at scale. You need to have a network, an operating system, if you will, if you're going to do that. But the last piece of the puzzle is opening up much larger amounts of capacity to do those use cases. And that's going to mean sunsetting 1.0, and we think the task force is a big step towards getting that done.

And I’ll reference back to what Chris said earlier is, independent studies have valued it as being a $10 billion unlocking of revenue for broadcasters. So we can’t lose sight of once 1.0 gets sunset of what that revenue potential is.

Your next question is coming from David Karnovsky from JPMorgan.

Lucy, just one on the Q2 guide. Can you just confirm if other media revenue line includes a management fee from Diamond? And if it does, how do we think about any risk to that going forward just given Diamond's Chapter 11 process?

Yes. So there is a management fee that's in there based on status quo from the March 2022 restructuring.

And in terms of the – yes, we’re – it’s currently paying at the level that was agreed to back in March of ‘22, which is deferred – on a deferred basis, and we expect that to continue until a new agreement is reached with Diamond and there isn’t a new agreement at this point in time. So until that happens, we can’t speculate.

Your next question is coming from Aaron Watts from Deutsche Bank.

You covered a lot of ground. I just had two quick ones. One, really a clarifier. As you move past the $75 million of infrastructure investments you highlighted that you'll be making this year, will Sinclair Ventures be self-funding via cash flows or distributions? Or should we expect cash from the stations to continue to provide support?

So there was two different things there, Aaron. The $75 million investment doesn't really have anything to do with ventures per se. That's focused on our broadcast operations and investing in their transformation. So I want to make sure we don't conflate those two. But in terms of your questions on ventures, you will see a much fuller financial picture of that once we complete the reorg in June, but it is expected that entity will be self-sustaining.

Okay. Great. And then maybe pointed at Lucy with this last one. Just given the current rate environment, macro backdrop, secular evolution continue to play out in the industry, has your mindset around where you'd like leverage to live for the business changed at all? And you talked about how you bought back stock in the quarter and post quarter end. How do you balance that opportunity against buying back your debt, which is currently trading at a discount to par value?

Yes. So Aaron, that’s actually a great question because the debt is also massively undervalued from where it should trade. So that’s something that we’re taking a look at. And to your leverage target question, look, our – for broadcast STG, the target remains high 3s, low 4s. As I said, we are going to be over that this year, and then it will start to come back down next year with political. And one thing to just keep in mind from a leverage standpoint because it’s a trailing 8-quarter calculation. So what you have going on also in part this year is that ‘23s EBITDA is less than ‘21. But then even when we get into next year with ‘24s political year, we expect it to be higher than ‘22s, we still have this drag from ‘23 in there. So we’ve got to kind of deal with everything that’s happening, and we’ve talked about quite a bit around the negative net etrains and absence of political and the investments we’ll need to live with that here through the end of ‘24 in that leverage calculation. But it doesn’t mean that the fundamentals of the business and the returns that we get on some of the things that we’re doing now aren’t playing out. So the focus for broadcast will be to get back down over time to that target leverage.

That concludes our Q&A session. I will now hand the conference back to Chris Ripley, President and CEO, for closing remarks. Please go ahead.

Thank you all for joining us today. If you should need more information or have additional questions, please don’t hesitate to give us a call.

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.